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CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–1A
1.
Over Under
Budget Actual Budget Budget
Customer service salaries $ 546,840 $ 602,350 $ 55,510
Insurance and property taxes 114,660 110,240 $ 4,420
2. The customer service and marketing salaries are significantly over budget. The
director should investigate the cause of these results. One possibility is that the
PROBLEMS
VALOTIC TECH, Inc.
Budget Performance Report—Director, Consumer Products Division
For the Month Ended January 31, 2016
24-21
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–2A
1.
West Central
Revenues $1,032,000 $1,872,000
Operating expenses 618,240 1,166,940
Supporting Schedule:
Service department charge rates for the two service departments, Customer Support
and Legal, are determined as follows:
West Central Total
Number of customer contacts… 6,000 9,000 20,000
Note (A) East Division: ($400,000 ÷
20,000 contacts) × 5,000 contacts
TRAXONIA RAILROAD INC.
Divisional Income Statements
For the Quarter Ended December 31, 2016
East
East
$870,000
563,300
5,000
24-22
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–2A (Concluded)
2. The CEO evaluates the three divisions using income from operations as a
percent of revenues (profit margin). This measure is calculated for the three
divisions as follows:
East Division: 16% ($139,200 ÷ $870,000)
3. To: CEO
The method used to evaluate the performance of the divisions should be
reevaluated. The present method identifies the amount of income from
operations per dollar of earned revenue. However, this company requires a
24-23
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–3A
1.
Sales
Cost of goods sold
Cereal Division:
Snack Cake Division:
$480,000 $8,000,000
$8,000,000 $4,000,000
Retail Bakeries Division:
$682,500 $9,750,000
$9,750,000 $6,500,000
Invested Assets
=
Rate of Return
on Investment
ROI = ×
×
2. Rate of Return
on Investment = Profit Margin × Investment Turnover
ROI =
THE CRUNCHY GRANOLA COMPANY
Divisional Income Statements
For the Year Ended June 30, 2016
Sales
Cereal Snack Cake
Retail
Bakeries
Division Division Division
$25,000,000 $8,000,000 $9,750,000
16,670,000 5,575,000 6,795,000
Income from Operations
×
Sales
24-24
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–3A (Concluded)
3. Per dollar of invested assets, the Snack Cake Division is the most profitable
of the three divisions. Assuming that the rates of return on investments do not
24-25
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–4A
2.
Sales
Cost of goods sold
1
$2,480,000 + $105,000
2
$2,500,000 – $312,500
3
$2,480,000 – $560,000
2,585,000
$2,905,000
Proposal 3
$3,500,000
Profit Margin × Investment Turnover
MAXELL MANUFACTURING INC.—COMMERCIAL DIVISION
Estimated Income Statements
Rate of Return
on Investment
Invested Assets
Rate of Return
on Investment
Sales
=Sales
Income from Operations
×
Proposal 1
For the Year Ended December 31, 2016
Proposal 2
1. =
1,920,000 2,073,300
$3,500,000
1
3
5
6
24-26
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–4A (Concluded)
$980,000 $3,500,000
$3,500,000 $4,375,000
4. Proposal 3 would yield a rate of return on investment of 35.0%. Proposal 2 would
yield a rate of return on investment of 22.4%.
5.
3. = Profit Margin × Investment Turnover
Sales
= ×
Sales
Income from Operations
Invested Assets
×
Rate of Return
on Investment
Rate of Return
on Investment
Rate of Return
on Investment
= Profit Margin × Investment Turnover
Proposal 2:
ROI =
24-27
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–5A
1.
Sales
$357,000 $2,550,000
$2,550,000 $2,125,000
Sales
Income from Operations
Invested Assets
Business Consumer
Division Division
Rate of Return
on Investment
×
2. = Profit Margin × Investment Turnover
Rate of Return
on Investment
Consumer Division: ROI =
× Sales
PAVONE COMPANY
Divisional Income Statements
For the Year Ended December 31, 2016
$2,550,000
=
$2,500,000
24-28
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–5A (Concluded)
4. On the basis of income from operations, the Consumer Division generated
$107,000 ($357,000 – $250,000) more income from operations than did the
Business Division. However, income from operations does not consider the
amount of invested assets in each division. On the basis of the rate of return on
24-29
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–6A
1. No. When unused capacity exists in the supplying division (the Consumer
2. The Consumer Division’s income from operations would increase by $31,680:
Increase in Consumer Variable
(Supplying) Division’s Transfer Cost Units
Income from Operations = Price – per Unit × Transferred
$31,680 =($115 –$104) × 2,880
By selling to the Commercial Division, the Consumer Division earns $11 per unit
on these sales.
The Commercial Division’s income from operations would increase by $100,800:
24-30
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–6A (Continued)
3.
Consumer Commercial
Division Division Total
Sales:
14,400 units × $144 per unit $2,073,600 $2,073,600
2,880 units × $115 per unit 331,200 331,200
GARCON INC.
Divisional Income Statements
For the Year Ended December 31, 2016
24-31
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–6A (Concluded)
4. The Consumer Division’s income from operations would increase by $63,360:
Increase in Consumer Variable
(Supplying) Division’s Transfer Cost Units
Income from Operations = Price – per Unit
×
Transferred
5. a. Any transfer price greater than the Consumer Division’s variable expenses
per unit of $104 but less than the market price of $150 would be acceptable.
b. If the division managers cannot agree on a transfer price, a price of $127*
would be the best compromise. In this way, each division’s income from
operations would increase by $66,240.
* $150 – $104 = $46
24-32
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–1B
1.
Over Under
Budget Actual Budget Budget
Sales salaries $ 819,840 $ 818,880 $ 960
System administration salaries 448,152 447,720 432
2. The customer service salaries exceed the budget by 20% of budget ($30,520 ÷
$152,600). The manager should request additional detailed information about the
customer service department. There are several possible reasons for the budget
ADELSON INC.
Budget Performance Report—Supervisor, Eastern District
For the Month Ended December 31, 2016
24-33
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–2B
1.
South West
Revenues $5,673,000 $5,130,000
Operating expenses 4,494,890 3,770,050
Income from operations before service
Supporting Schedule:
Service department charge rates for the two service departments, Dispatching and
Equipment Management, are determined as follows:
South West Total
Number of scheduled trains……
…
1,105 845 2,600
Number of railroad cars in
inventory…………………………
…
8,400 9,600 24,000
Note (A) East Division: ($182,000 ÷
2,600 scheduled trains) × 650
THOMAS RAILROAD COMPANY
Divisional Income Statements
For the Quarter Ended December 31, 2016
North
$3,780,000
2,678,500
North
650
6,000
24-34
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–2B (Concluded)
2. The CEO evaluates the three regions using income from operations as a percent
of revenues. This measure is calculated for the three regions as follows:
3. To: CEO
The method used to evaluate the performance of the regions should be
reevaluated. The present method identifies the amount of income from operations
per dollar of earned revenue. However, a railroad company requires a significant
24-35
